DfT appoint bankers, Rothschild, to advise government on runway after Airports Commission reports

Date added: April 14, 2015

The DfT has appointed the bankers, Rothschild, to help evaluate Gatwick and Heathrow’s runway plans, after the publication of the Airports Commissions report that is due in June. That implies the Commission will not have ruled one or the other out. Either of the runway plans would rank among Britain’s biggest-ever, and most expensive, infrastructure projects. Rothschild would provide advice to ministers and officials, and DfT said: “Rothschild was appointed to provide financial advice to assist our understanding of the deliverability of any new runway capacity.” Labour and the Conservatives have been urged by business lobbying groups to make a swift decision to approve a runway. The reality is that a huge number of issues have not been fully dealt with by the Commission, and a great deal of further work needs to be done, before a runway could properly be considered. The Airports Commission estimated the cost of Heathrow’s NW runway at £18.6bn without factoring in public money for improved road and rail links; cost of Heathrow Hub’s Plan at £13.5bn; Gatwick’s plan at £9.3bn. The Commission estimated that HAH could have to raise additional equity of up to approximately £8.4bn and debt of up to roughly £29.9bn. “Raising this level of financing would be challenging.” Hence the need for bankers to advise.
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Government banks on advice as runway verdict looms

9.4.2015

(Hounslow Chamber of Commerce)

Bankers have been hired to advise Whitehall on airport expansion ahead of a crucial decision on a new runway. [At an enormous – unstated – cost to the taxpayer …]

The Department for Transport (DfT) has appointed Rothschild to help evaluate Gatwick and Heathrow’s rival expansion proposals, either of which would rank among Britain’s biggest-ever infrastructure projects.

Sources said on Thursday that Rothschild would provide advice to ministers and officials in the wake of the publication of the final report of The Airports Commission, which is expected during the summer. [Some time in June probably – before 6th July].

Sir Howard Davies, the Commission’s chairman, will recommend the provision of a new runway at either Gatwick or Heathrow, and Labour and the Conservatives have been urged by business lobbying groups to make a swift decision about implementation.

The timing of Rothschild’s appointment is understood to have pre-dated Whitehall going into ‘purdah’ ahead of next month’s General Election.

A DfT spokeswoman said: “As part of the Department’s preparation for receiving the Airports Commission’s final report, Rothschild was appointed to provide financial advice to assist our understanding of the deliverability of any new runway capacity.”

In recent months, Gatwick and Heathrow have intensified their battle to win public support for their respective expansion proposals, spending millions of pounds on advertising and public relations campaigns.

The two airports’ owners’ proposals have been shortlisted by the Commission, alongside a separate proposal from a private consortium called Heathrow Hub, which wants to extend the northern runway and then divide it into two in order to expand capacity.

All three options have been assessed by the Airports Commission, with Heathrow Airports Holdings’ (HAH) standalone third runway plan estimated to cost £18.6bn without factoring in public money for improved road and rail links; Heathrow Hub’s Plan has been costed at £13.5bn; Gatwick’s expansion is projected to require an outlay of £9.3bn.

Heathrow’s expansion is, however, regarded as offering the biggest economic benefits in terms of job creation, while Gatwick argues that the noise impact would be far greater at its rival airport.

In a consultation document published last year, the Airports Commission estimated that HAH could have to raise additional equity of up to approximately £8.4bn and debt of up to roughly £29.9bn.

The Commission said: “This will put the airport at the highest end of the range of financing for infrastructure projects in the UK and could make Heathrow Airport Ltd of comparable scale to Network Rail (with a long-term debt of circa £35bn) and larger than National Grid (circa £25bn). Raising this level of financing would be challenging; and there are risks associated with any increase of per passenger aeronautical charges to circa £30, significantly higher than current charges across the UK and globally, in a context where Heathrow must compete with other airport operators.”

The Commission said Gatwick’s proposal could require additional equity of up to £3.7bn and additional debt of up to £14.3 bn.It said that this level of finance was:

” ‘Not unprecedented for infrastructure projects and airports’ but cautioned that it was significantly larger than the company’s financing to date and may be challenging in a context where there is uncertainty around passenger demand forecasts and where the airport may need to raise its aero charges from £9 per passenger to up to c. £15-18 or more within a competitive environment.”

Rothschild is a long-standing adviser to the UK Government, having assisted with the privatisation of part of the state’s shareholding in National Air Traffic Services (NATS), and advising on the future of Royal Mail under the previous Labour administration.

GACC (the Gatwick Area Conservation Campaign) comments:

Moreover the Commission has only looked at the infrastructure cost of the Gatwick runway in 2030 when the runway would be well below full capacity. The cost of a new underground station at East Croydon etc would raise the cost of the Gatwick option to around £20 billion.

The DfT will need to be prepared for any questions that the new Ministers may throw at them.

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Part of GACC’s reponse to the Airports Commission consultation. 1st Feb 2015

Higher Cost

91. The consultation document estimated that the cost of building a new Gatwick runway would be up to £9.3 billion.47 However, the Commission’s new paper – Cost and revenue identification: Gatwick Airport second runway published on 22 January 2015 suggests that the cost could be as high as £10.7 billion.

92. To meet criticism by the Commission, GAL have now agreed to bring forward the construction of the new terminal and rapid transit system. While this change will not increase the total cost, it will increase the difficulty of raising the initial finance for the project. The difficulty of raising finance will be increased by the opposition of almost all the local authorities, by the local Members of Parliament, and by easyJet and British Airways.

93. In this response we have identified various items where we consider that the cost of the Gatwick option has been under-estimated in the consultation document and in the Cost and revenue identification paper. In the table below we give very rough, back-of-an envelope estimates for the cost of these items. We emphasise that these are not precise estimates, merely informed guesses which may serve to demonstrate the order of magnitude by which the cost of the Gatwick runway option should be increased. The first column gives the reference to the relevant paragraph in this response; the second column gives the total cost; the third the amount that should by paid by Gatwick Airport Ltd; and the right hand column the approximate amount that might fall on the UK Exchequer and on the taxpayer.

94.The largest item is the cost of a new underground station at East Croydon and new rail tunnel into London, as suggested (in the Commission’s report on surface access) would be needed when Gatwick was operating at full capacity after 2040. We have put this in at £7.5 billion, half the cost of Crossrail. Response from GACC 15

95.To the extent that the extra rail traffic was due to natural growth or to the catalytic or induced employment created by Gatwick expansion, the cost would fall on the Exchequer. To the extent that the traffic resulted from extra air passengers and extra airport staff after 2040, it should in theory be borne by Gatwick Airport Ltd. We accept, however, that it would be difficult to collect this money in advance, and therefore we have allocated the whole cost to be met by the taxpayer.

96.Our rough calculations indicate that the total cost of the Gatwick runway option might be around £20 billion compared to the £9.3 billion suggested in the consultation document. Before the Commission make any recommendation they should revise their estimates of the cost of the Gatwick option on the lines suggested above.

Gatwick airport have made a very rash promise not to raise their landing charges above £15 (plus inflation) for 30 years, if they get a 30 contract from the government (details not specified – see below). Brendon Sewill, of GACC (Gatwick Area Conservation Campaign) said: “The whole runway project is in doubt…. Gatwick’s rash promise not to raise airport charges above £15 per head …. seriously puts in question whether building a new runway at Gatwick is a viable business proposal – either for the present owners or for the new owners if Gatwick is sold.” The Airports Commission calculate that Gatwick charges would need to rise to ‘between £15 and £18, with peak charges of up to £23. GACC points out that Gatwick’s promises are meaningless unless they are put into a legal agreement binding on the present airport owners – and future owners. If so, the £15 would become a legal maximum – rather than the current £9. Even at £15, some airlines, and passengers might well decide instead to use much cheaper airports such as Stansted or Luton. GACC has pointed out to the Airports Commission the risk that Gatwick may have fewer passengers than forecast, in which case the cap of £15 may not be sufficient to cover the costs of a new runway and new terminal. Brendon Sewill asks: “What would happen if the money runs out when the new runway is only half built?”